Japan steals march on Asia rivals over uranium supply

MariIwata

TOKYO (MarketWatch) -- Japanese firms can afford to wait for uranium prices to fall before buying fresh stakes in uranium mines owing to a run of deals in resource-rich Kazakhstan, said a senior government official.

"Japan has secured (the equivalent of) 30%-40% of its annual uranium imports just from its Kazakh stake buys," said Harufumi Mochizuki, director-general of the Agency for Natural Resources and Energy, a unit of the Ministry of Economy, Trade and Industry.

Kazakhstan holds the world's second-largest reserves of uranium, a key fuel in the generation of nuclear power.

As a result, the Central Asian nation is increasingly a target of major energy consumers including China which are planning to expand their nuclear power output over the next few decades to cut their reliance on coal and oil.

Rising demand for uranium in Asia has coincided with supplies becoming tighter on bad weather.

The resulting surge in uranium prices led to a wave of industry consolidation. French nuclear giant Areva (CEI.FR) bought Canada's Uramin, while Australia's Toro Energy Ltd. (TOE.AU) made a A$276 million friendly takeover offer for fellow uranium explorer Nova Energy Ltd. (NEL.AU) among other sector deals.

"Uranium business has basically been a seller's market, but we moved slightly ahead" of rivals in China and South Korea, said Eiichiro Otsuka, deputy general manager of the Nuclear Energy Department at Sumitomo Corp. (8053.TO).

In January 2006, Sumitomo Corp. bought a 25% stake in the West Mynkuduk uranium project in Kazakhstan.

Some months later, Junichiro Koizumi visited Kazakhstan for the first time as Japan's prime minister, to talk about uranium exports to Japan. Another government delegation led by METI minister Akira Amari visited the country early in 2007 to maintain the relationship.

Kansai Electric Power Co. (9503.TO), Japan's second largest utility by capacity, also bought a 10% stake in the West Mynkuduk project, while the remaining 65% is held by state-owned uranium company Kazatomprom.

The project, expected to start test production in the next few months, is scheduled to reach full output of about 1,000 metric tons a year in 2010 and keep going for more than 20 years. All of the output will be sold to Japanese utilities, Otsuka said.

Marubeni Corp. (8002.TO) and other Japanese companies including Tokyo Electric Power Co. (9501.TO), Japan's largest utility by capacity, have invested in another Kazakh uranium project, namely the Kharassan mine project, through a Japanese holding company since the start of last year.

The holding company has indirect ownership interest in two affiliates, each of which operates one uranium block.

Details of the stakes haven't been disclosed, but the Japanese side has the right to take 2,000 tons a year of uranium from the project, which is scheduled to reach full production in 2014, according to Marubeni.

"Thanks to (these deals), we won't have to worry (about uranium supply) for a substantial period of time," said ANRE's Mochizuki.

Recycling Is Key

Sumitomo Corp. has also looked beyond Asia for equity stake purchases in uranium mines, even if the fuel produced never makes it back to the Japanese market.

In July, Sumitomo took a 40% stake in the Roca Honda uranium project in New Mexico, the U.S., with Canada's Strathmore Minerals Corp. (STM.V) owning the remaining 60% interest. The firms have been conducting a feasibility study of a uranium mine in the U.S. with a view to selling any future output to U.S. utilities.

Spot uranium prices rose sharply earlier this year to hit a record high of $135 a pound in June, some 20 times the level in late 2000. Prices have fallen to around $80/lb since then, but are still very high compared with the $15-$20/lb level of 2004, according to industry papers.

Stakes in uranium mines have become so expensive that "we had few choices but to get into the project at the feasibility study stage," said Otsuka.

Both Sumitomo Corp. and Marubeni say they are interested in buying further equity stakes in uranium mines, given the likely surge in global uranium demand.

Within Asia, China is planning to build 30 new nuclear reactors over the next 13 years to supplement the nine that are operational at present, although the International Energy Agency and other experts think its plans are ambitious.

But demand for uranium may also rise in Europe, where worries about climate change and a dependence on gas supplies from Russia are leading countries to look more favorably on nuclear power generation.

Will Japan's companies be able to stay out of the market if overseas rivals continue to pay huge premiums to lock in uranium supplies?

Yes, says Mamoru Kato, an analyst with Tokai-Tokyo Securities Co., "as long as the country can launch uranium recycling at its nuclear power plants."

The number of nuclear power plants in Japan won't rise sharply, so domestic uranium demand will be restrained, Kato said.

In addition, Japan's power consumption is expected to fall because of its aging population and improved energy efficiency.

Uranium fuels have been recycled for a number of decades at nuclear power stations in France and Germany without any major safety problems, but Japan hasn't followed suit except in some test cases, mainly because fuels made from primary uranium were cheap until recently.

The Federation of Electric Power Companies, an industry body comprising 10 major utilities, has a target to start fuel recycling at some 30% of all 55 reactors operating in Japan in the fiscal year ending in March 2011.

Local opposition, however, will be a major challenge, said Kato. A series of scandals and accidents at nuclear power stations, including falsified data and cover-ups, in the past years have made the general public skeptical about nuclear safety.

Most recently, Tokyo Electric's 8.2-gigawatt Kashiwazaki-Kariwa nuclear power plant in northwestern Japan automatically shut in mid-July when the region was hit by a strong earthquake.

At that time, the utility took a few hours to announce a leak of radioactive material, which enraged the local community and the public even though the leakage was slight.

"Still, there's no need to worry" about uranium supply, said ANRE's Mochizuki.

"I'm talking about the longer term. A few years of delay in schedule won't make a big difference."

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